James Byrnes, Meet Brendan Carr!

 You may not know the name James Byrnes! But, for me, he comes to mind. Mr. Byrnes once declared: The nearest approach to immortality on Earth is a government bureau." 

James Byrnes served as a governor of South Carolina, United States Senator, a Supreme Court Justice, and U.S. Secretary of State, aside from other government positions. Yes, you read that right!

 

So, by virtue of his experience, Mr. Byrnes knew a thing or two about the difficulty of shrinking the size of government.

 

Admittedly FCC Chairman Brendan Carr hasn't served in as many high-level government positions as James Byrnes. No one else has. But Carr has served in key FCC positions long enough – as General Counsel, Commissioner, and now Chairman – to understand that there are plenty of legacy regulations remaining in the FCC's rule book that are no longer necessary. Not only are they no longer necessary, but many of them, considering the dramatically changed telecommunications and media environment since they were adopted, impose costs and burdens that affirmatively harm consumers and competition.

 

I have criticized a few actions taken by Chairman Carr, for example, the use of the agency's transaction review process to impose extraneous conditions not unique to the transaction in approving the Skydance – Paramount CBS transaction, and the imposition of what appears to be an unwarranted forfeiture on Telnyx without fair notice of what standard it was expected to meet.

                                                                 

                                                                          

But, on the whole, I applaud the way that Chairman Carr is forging ahead in the DELETE, DELETE, DELETEproceeding and others to remove bunches of regulations that should no longer exist and, frankly, should have been eliminated years ago. For example, yesterday the Commission proposed to eliminate nearly 100 outdated, no longer necessary, broadcast rules using the Direct Final Rule process. The public will have 10 days after Federal Register publication to offer comments regarding any of the proposed rules. Absent the submission of a "significant adversecomment," the proposed elimination of the rule will occur. If the Commission determines that a "significant adverse comment" has been submitted, then that particular rule will go through the normal notice and comment process.

 

In a 1995 Recommendation, The Administrative Conference of the United States (ACUS), of which I have served as a Public Member and now Senior Fellow, suggested that agencies use the Direct Final Rule process to more quickly eliminate unnecessary regulations "in all cases where the ‘unnecessary’ prong of the good cause exemption is available…." On many occasions since then, to little or no avail, I have urged the FCC to consider employing the process.

 

So, I heartily commend Brendan Carr for taking the initiative to do so now. There will still be an opportunity for public comment when the Direct Final Rule process is employed, and, if experience proves there is a need, there can be adjustments to ensure that non-frivolous substantive objections are properly considered.

 

Shortly before becoming FCC Chairman, Ajit Pai, speaking at a Free State Foundation event, declared: “We need to fire up the weed whacker and remove those rules that are holding back investment, innovation and job creation.”Considering all the obstacles, including the time and energy expended to reverse the then-existing mandate regulating Internet service providers as public utilities, Chairman Pai made a good start. But now Chairman Carr has truly fired up the metaphorical "weed whacker" in a way that looks to make meaningful progress in the cause of eliminating costly, burdensome, unnecessary regulations.

 

He may not have eliminated a government bureau. But I suspect that James Byrnes would give Brendan Carr credit for what he's doing on the deregulation front.

Maryland Needs to Improve Its Regulatory Climate

Earlier this month, the Mercatus Center at George Mason University released a report comparing the regulatory restrictions in each state. Maryland is “only” the 21st most regulated state in the United States, but it still has over a hundred thousand state rules in its regulatory code. Perhaps its ranking makes it seem that Maryland is doing all right compared to other states, as it is in the middle of the pack. But a deeper look at the results shows a more troubling picture.

The report was produced by Mercatus Center Senior Research Fellow and Policy Analytics Director Patrick McLaughlin and Professor Dustin Chambers from Maryland’s Salisbury University. They found that the U.S. Code of Federal Regulations and Code of Maryland Regulations place over 1.2 million regulatory restrictions on Marylanders. Furthermore, the report asserted Maryland’s regulatory growth between 1997 and 2015 put over 109,000 Marylanders in poverty, causing the state to lose 2,292 jobs yearly and experience a 7.35% price increase.

The report doesn’t just compare the total number of regulations in each state; it breaks them down by sector. While Maryland’s overall regulatory regimes could be described as mediocre at best, it over-regulates some industries and regulates only a few less than the national average. For example, Maryland has over 5,000 more health service regulations than the average state. Additionally, it has around 2,000 more administrative services regulations and 1,500 more transportation regulations than the average state.

There are also some industries where Maryland has fewer regulations than average, such as Waste Management, Commerce, and Chemical Manufacturing. To some extent, these industries reduce the impact of the above overregulated sectors on Maryland’s score, which is why Maryland is wedged between Maine and Mississippi as the 21st most regulated state. However, Maryland still has more rules than many states that have heavy-handed regulatory systems, such as Hawaii, Connecticut, and Vermont.

The report proposes multiple solutions to address Maryland’s growing regulatory system, focusing on policies that balance regulation creation with regulation elimination. The first suggested reform is to create a “regulatory budget,” which would place a cap on how many regulations the state can have at one time. Requiring some percentage of rules to be cut, or a “one in, X out” rule, would be ways to accomplish this. Another reform would be to adopt regulatory sunsets, which require the legislature to explicitly renew regulations in order for them to continue, forcing periodic legislative reviews of existing rules.

While Maryland’s regulatory scheme is not as overbearing as some states, the negative impacts of its current system are real. Maryland should look at the results of this report and move in the direction many other states are: removing unnecessary red tape for businesses and ordinary citizens. That way, Maryland can come closer to becoming an economic leader.

FCC's Dated View Drives Dramatic Shifts in Video Strategies

In a recent post featured in today's Policyband newsletter (subscription required), Golden West Telecommunications Cooperative explained (and apologized to its customers for) a $4 per month price increase for video services. The reason put forth: rising cable programming and retransmission consent fees. Golden West even pointed out that "[o]ther telecommunications cooperatives in South Dakota have discontinued cable TV due in part to rising costs" – an exodus part of "a broader trend" that includes WideOpenWest and Frontier Communications.

I and other Free State Foundation scholars have documented extensively the rapid and relentless ascent of streaming services and the corresponding loss of subscribers by traditional providers subject to the FCC's statutory authority. We have argued that these seismic shifts demand an aggressive deregulatory response from both Congress and the Commission. We have implicated the latter's refusal to eliminate one-sided rules – and confounding desire to impose still more one-sided rules – as an exacerbating factor in the decline of facilities-based Multichannel Video Programming Distributors (MVPDs). And we have explained how that decline harms competition and, in turn, consumers.

Not surprisingly, these marketplace trends are not slowing down. By way of example, Netflix days ago announced that it added 1.45 million subscribers in the United States and Canada during the second quarter, bringing its total to over 84 million. Traditional providers, on the other hand, experienced yet another "worst quarter ever" between January and March – an overall drop in pay television subscriptions that surpassed 12 percent – and analysts anticipate that second quarter results could be just as bleak.

Nevertheless, the FCC remains unwilling to remove its blinders and focus on the reality before it. Consequently, an increasing number of facilities-based MVPDs are adapting to the steadily more inhospitable competitive landscape by embracing an "if you can't beat them, join them" approach that deemphasizes their own legacy bundled offerings. Some, as noted above, are exiting the marketplace altogether and/or outsourcing their video operations to virtual MVPDs (vMVPDs) – WideOpenWest, for instance, has partnered with YouTube TV.

Others are striking deals with programmers and streaming platforms so that they can provide consumers the online alternatives that they prefer over traditional video packages. Examples include:

• Comcast is offering broadband customers the Xfinity StreamSaver™ bundle that includes Apple TV+, Netflix Standard with ads, and Peacock Premium with ads. As I noted in a recent post to the FSF Blog describing the available-at-retail Xumo platform, Comcast provides broadband customers with a Xumo Stream Box – which supports hundreds of third-party apps, including those of multiple vMVPDs that compete directly with its own legacy video products – at no additional cost.
• Charter gives subscribers to certain Spectrum TV® video packages access to Disney+ Basic and ESPN+. It also provides a free-for-six-months Xumo Stream Box to those that subscribe to Spectrum One Stream and add Spectrum TV.
• Altice USA last week announced the launch of Entertainment TV, a vMVPD service that offers over 80 channels for $30 per month and is available to broadband subscribers as part of its Optimum Stream product. As reported by Daniel Frankel, managing editor of Next TV, "[l]ike many cable operators, the company would prefer to leave linear video behind."

Traditional MVPDs find it increasingly challenging to win and retain customers in the vibrantly competitive battle for eyeballs that includes not just streaming alternatives, but social media platforms – particularly YouTube – and gaming. The FCC's dogged determination to saddle them with even more one-sided rules, such as unreasonable constraints on their ability to employ common billing practices, is exacerbating the situation and driving them to retrain their focus. As a result, consumer choice and overall consumer welfare are compromised.

Xumo Streaming Devices Compel the Sunset of Set-Top Box Rules

The Free State Foundation's recent comments responding to the FCC Office of Economics and Analytics' State of Competition in the Communications Marketplace Public Notice argued that "the Commission should follow its sound decision in September 2020 to terminate the 'unlock the box' navigation device proceeding and announce that the sunset provision set forth in Section 629(e) of the 1996 Act has been satisfied." Comcast's announcement on June 27, 2024, that Xumo streaming devices, which are available for purchase at retail and now support a fourth competing virtual Multichannel Video Programming Distributor (vMVPD), is a more than compelling reason to take that long overdue step.

Enacted nearly three decades ago in a context today wholly unrecognizable, Section 629 sought "to assure the commercial availability … of converter boxes … and other equipment used by consumers to access multichannel video programming … from manufacturers, retailers, and other vendors not affiliated with any" MVPD. The Commission effectively abandoned this misguided effort four years ago, but it stopped short of triggering the sunset provision set forth in subsection (e). Consequently, the regulatory requirement that cable operators make available "separable security" remains on the books (and imposes needless costs).

Source: xumo.com

The Xumo platform, the product of a joint venture that includes Comcast and Charter, provides consumers with access to three of the largest cable services – Comcast's Xfinity, Charter's Spectrum, and Mediacom's Xtream – as well as over 250 third-party apps.

Xumo devices can be obtained directly from these providers (in some cases for free) or – critically – at retail. The Xumo Stream Box can be purchased directly from the Xumo website, while Xumo TVs manufactured by Pioneer, element, and Hisense are available on store shelves at Best Buy, Meijer, and Walmart.

Consequently, the goal of Section 629 – to make it possible for subscribers to purchase a set-top box from a third party rather than lease one directly from their provider – clearly has been achieved. (The longstanding availability of app- and browser-based options to access MVPD services similarly satisfied that objective, notwithstanding the FCC's unwillingness to acknowledge that fact.)

But wait, there's more: not only does the Xumo platform foster device-based competition, it also facilitates service-based competition. As noted above, Xumo devices recently added support for Fubo, a vMVPD that competes with traditional MVPD offerings. And that's on top of existing support for popular vMVPDs YouTube TV, Hulu + Live TV, and Sling TV.

Subsection(e) of Section 629 states that any rules adopted thereunder "shall cease to apply when the Commission determines that (1) the market for the [MVPDs] is fully competitive; (2) the market for [devices] used in conjunction with that service is fully competitive; and (3) elimination of the regulations would promote competition and the public interest."

Xumo devices singlehandedly satisfy the first two conditions, and the sunset of one-sided rules that unjustifiably impose compliance costs clearly would "promote competition and the public interest." All that is left is for the Commission to acknowledge – "determine," per the language of the statute – that which undeniably is true.

The California COLR Rebuttable Presumption Should Be Flipped

 In “CPUC Denies COLR Relief to AT&T but Will Weigh Updating Rules,” published on June 21, Communications Daily’s Adam Bender has a good account of the California Public Utilities Commission’s denial of AT&T’s request, as an incumbent carrier, to be relieved of what’s called “Carrier of Last Resort” (COLR) obligations. As the designation implies, AT&T and other COLRs, cannot simply stop providing service without prior government permission. By the way, as you might anticipate, the COLR designation comes with strict regulation of rates and other terms of service.

In an era before consumers in almost all areas of the country, including California, had more than a single option from which to choose for the provision of basic voice telephone service, it may have made sense for the government to have the power to require that a service provider be designated as the Carrier of Last Resort. Needless to say, nowadays, consumers in most all areas have several options for acquiring voice telephone service from various providers that employ different technologies – copper wires, coaxial cable, fiber, cellular, satellite, and hybrid networks combining these facilities.

Without belaboring the point here in this short post, the carrier that happens to be saddled with COLR obligations, some of which are costly and involve offering free or reduced-price services and maintaining in place legacy equipment, likely is put at a competitive disadvantage vis-à-vis other competitors. But here I don’t want to argue the particulars of AT&T’s case, which it can do itself.

I only want to comment on one aspect of the CPUC’s action that was highlighted in the Communications Daily report. In initiating a new proceeding to consider whether the Commission should revise its COLR rules, the agency declares it “adopts a rebuttable presumption that the COLR construct remains necessary, at least for certain individuals or communities in California.”

Given the undeniable change in the competitive landscape, driven by ongoing technological advancements, since the “Carrier of Last Resort” concept was developed, the CPUC has the presumption backwards. In other words, there should be a rebuttable presumption that the COLR construct remains unnecessary.

As far back as 2011, I was suggesting in papers that, in light of the rapidly changing competitive landscape even then, the FCC should employ rebuttable presumptions in favor of regulatory relief in its mandated periodic regulatory reviews and consideration of forbearance petitions.

It’s 2024. In its consideration of whether to retain COLR, the California Public Utilities Commission should flip its proposal and its regulatory mindset. Retaining outdated legacy regulations that impose unnecessary costs harm overall consumer welfare. There should be a rebuttable presumption that the COLR construct remains unnecessary.

 

Legacy Copper Lines Divert Resources from Broadband Upgrades

Participants in an AT&T Policy Forum on Tuesday made a compelling case that "carrier of last resort" regulations – specifically, the costly obligation to maintain little-used legacy copper lines – divert resources away from broadband network construction.

Titled "Network Modernization: Connecting Changes Everything," the forum featured a fireside chat between Jonathan Spalter, USTelecom's President & CEO, and Chris Sambar, AT&T's Head of Network, Executive Vice President, Technology Operations.

During their conversation, Mr. Sambar revealed that AT&T spends upwards of $10 billion each year to maintain its copper lines – only 5 percent of which are still used.

Relatedly, on May 20, 2024, USTelecom published "Network Modernization: A Vital Step Toward Universal High-Speed Broadband," an Issue Brief highlighting the fact that "less than two percent of U.S. households today rely solely on landline connections."

Certainly in low-population-density areas where reliable wireless service is available, the rote enforcement of legacy rules requiring costly copper upkeep today does not serve the needs of residents.

More broadly, Congress, the FCC, and state regulatory bodies should update expeditiously their policies to redirect finite financial resources to their highest and best use: the construction of broadband infrastructure that brings twenty-first century connectivity – including enhanced emergency services – to rural communities.

As USTelecom concluded in its Issue Brief:

Consumer demand is driving the transition to universal broadband. But outdated regulations are pulling us back – siphoning off time and resources away from the goal of universal broadband to maintain old copper networks rather than speeding reliable, high-speed internet to everyone. We need a modern regulatory environment that advances rather than undercuts tech modernization. Achieving the shared goal of universal broadband requires a shared determination to look to the future, not remain stuck in the past.

House Commerce Subcommittee to Hold Hearing on Video Marketplace

The House Energy and Commerce Committee's Subcommittee on Communications and Technology will hold a hearing tomorrow at 2 pm ET entitled "Lights, Camera, Subscriptions: State of the Video Marketplace." Promisingly, this hearing will focus, at least in part, on outdated regulations that inappropriately impede traditional video programming distributors' ability to participate in an increasingly competitive marketplace.

When announcing the hearing, House Energy and Commerce Committee Chair Cathy McMorris Rodger (R-WA) and Communications and Technology Subcommittee Chair Bob Latta (R-OH) stated the following:

Over the last decade, the video marketplace has undergone a transformative shift as more media content moves online. The introduction of streaming services expanded the options for consumers to choose where, when, and what content they view. While there is an unprecedented amount of content, like movies, TV shows, and news, available, the rise of these services creates challenges for traditional media providers who continue to compete despite being saddled with regulations. We look forward to discussing the evolution of this market, the steps Congress can take to ensure outdated regulations do not hinder innovation and competition, as well as how to bring the traditional marketplace into the 21st century.

Scheduled witnesses include:

• FuboTV Inc. Board Member and CEO David Gandler (witness testimony)
• National Association of Broadcasters President and CEO Curtis LeGeyt (witness testimony)
• Consumer Reports Senior Policy Counsel and Manager of Special Projects Jonathan Schwantes (witness testimony)
• America's Communications Association – ACA Connects President and CEO Grant B. Spellmeyer (witness testimony)

In a recent post to the Free State Foundation's blog, I presented the latest evidence of longstanding subscriber trends – specifically, that traditional video programming distribution platforms, both facilities-based and virtual, continue to shed customers while countless streaming services add them.

Consequently, and as I argued in "With Pay-TV on the Wane, Legacy Regulations Should Follow," a July Perspectives from FSF Scholars, "consumers have available more than sufficient choices to compel a comprehensive change in course away from government intervention … and toward the exclusive reliance upon efficiently operating market forces."

Perhaps tomorrow's hearing will serve as a significant step in that direction.

Video Subscriber Updates Underscore Ongoing Shift to Streaming

In a July 2023 Perspectives from FSF Scholars, I took aim at the core assumption underlying calls to expand the definition of a "Multichannel Video Programming Distributor" (MVPD) to include virtual substitutes streamed over the Internet (vMVPDs). Contrary to what proponents might have you believe, subscribers cutting the physical cord are not switching en masse to online alternatives. Instead, they're migrating primarily to streaming platforms like Netflix, Hulu, and Amazon Prime.

The latest video subscriber numbers provide further evidence that both facilities-based MVPDs (cable, Direct Broadcast Satellite (DBS), telco TV) and vMVPDs are weathering the impact of a seismic shift in consumer preferences away from the monolithic video "big bundle" to a self-curated collection of more targeted offerings.

Some key data points:

• According to the Leichtman Research Group (LRG), the top cable operators lost 925,532 subscribers during Q2. The two DBS providers, DIRECTV and DISH TV, combined shed nearly 600,000 customers. And Verizon FiOS saw its total drop by 70,000. Overall, LRG found that traditional MVPDs lost 1.61 million customers.
• Wells Fargo analyst Steven Cahall reported even higher traditional MVPD declines: 1.72 million customers, representing 7 percent of the total.
• Overall, LRG saw vMVPD subscriber totals decline in Q2 by 115,000 – despite an estimated 200,000 additional YouTube TV customers. (Note that not all vMVPDs release subscriber data to the public.)
• Steven Cahall, meanwhile, saw vMVPDs add just 8,000 subscribers in Q2.
• Netflix, on the other hand, added 1.17 million customers in the United States and Canada during Q2, for a total of 75.57 million.
• And Hulu added 300,000 subscribers in Q3, for a total of 44 million subscribers.

As I concluded in "With Pay-TV on the Wane, Legacy Regulations Should Follow," the appropriate response to these ongoing trends is to eliminate outdated rules, not expand them:

Put simply, the issue is not that the definition of an MVPD is not sufficiently broad, it's that pay-TV companies confront a marketplace that is dramatically changed…. To fully harness for consumers the benefit-generating engine that is competition, it is time for regulators (and regulations) to step aside and let the marketplace drive optimally efficient outcomes.

Greater Video Competition Should Prompt Less Regulation, Not More

Dormant for nearly a decade, the FCC's misguided proposal to expand the definition of "Multichannel Video Programming Distributors" (MVPDs) – a category limited to facilities-based offerings such as cable, Direct Broadcast Satellite, and telco TV – recently has received renewed attention. In a letter dated March 24, 2023, responding to an inquiry from Senator Charles Grassley (R - IA), FCC Chairwoman Jessica Rosenworcel pointed to statutory definitions as the basis for not subjecting MVPDs that stream content over the public Internet – that is, "virtual MVPDs" (vMVPDs) such as YouTube TV, Hulu + Live TV, Sling TV, and DIRECTV STREAM – to legacy regulations.

This is the right outcome, of course. However, the justification put forth overlooks the forest for the trees. The dramatic rise of vMVPDs, as well as the multitude of other Online Video Distributors (OVDs) that make video content available to consumers – think Netflix, Amazon Prime Video, Hulu, Disney+, Apple TV+, HBO Max, Paramount+, and so on – has rendered the video programming marketplace robustly competitive. Consequently, the goal of the Commission in 2023 should be to identify opportunities to eliminate outdated rules that apply to traditional MVPDs, not extend them to the new entrants whose competitive influence obviates any justification for regulatory intervention.

I, as well as other Free State Foundation scholars, document regularly the rapid growth of streaming services at the expense of traditional MVPDs. Recent examples include "On Video, the FCC's Competition Report Falls Short," a January 2023 Perspectives from FSF Scholars, and "A Tale of Two Trends: Traditional Video Distributors Shrink While Streaming Video Grows," a Perspectives published in September 2022.

In the latter, I followed these changed circumstances to their logical conclusion, writing that:

[I]t is past time for the Commission and Congress to take all necessary steps to eliminate one-sided burdens that impede competition – such as set-top box regulations, program access and carriage requirements, and the network non-duplication and syndicated exclusivity rules [that apply solely to facilities-based MVPDs] – and instead rely on the efficient operation of marketplace forces to drive down prices and expand consumer choices.

Chairwoman Rosenworcel did acknowledge the current competitive reality in her letter to Senator Grassley, highlighting the fact that "the video marketplace has changed significantly with the introduction of streaming services." Nevertheless, and as was the case with the 2022 Communications Marketplace Report, she failed to articulate an appropriate deregulatory response.

While it is true that vMVPDs do not deliver video content within "a portion of the electromagnetic frequency spectrum which is used in a cable system" and therefore do not fall within the statutory definition of an "MVPD," it is equally true that, given the vast array of competitive options available to consumers, regulations premised upon that technical distinction have outlived whatever utility they once may have had and should be eliminated.

Consumer Preferences Steadily Shift to Streaming Video

During the second half of 2022, the percentage of U.S. households with a pay TV subscription (think: "cable") fell below half for the first time. When presented with the choice between accessing a specific show on a linear channel or a subscription video-on-demand (SVOD) service, consumers increasingly opt for the latter – and not just to avoid ads: younger Americans, in particular, "emphasize that SVOD is the place where they already watch shows most of the time." And speaking of SVOD, one analyst expects SVOD services to add 40 million new subscriptions in 2023 – an impressive feat given current economic conditions.

Indeed, each passing week seemingly provides additional evidence that consumers prefer their video streamed – and that, as a result, in 2023 no justification exists for regulations that single out traditional providers of video content. Far from gatekeepers, cable operators and other facilities-based Multichannel Video Programming Distributors (MVPDs) find themselves uniquely stymied by legacy rules predicated upon marketplace conditions that simply do not exist today.

In Comments and Replies filed in the 2022 Communications Marketplace Report proceeding, Free State Foundation scholars (1) documented the rapid consumer migration from traditional MVPDs to Internet-based alternatives, and (2) and argued persuasively that, consistent with its statutory responsibility to identify "laws, regulations, [and] regulatory practices [that]... pose a barrier ... to the competitive expansion of existing providers of communications services," the FCC should take swift steps to eliminate outdated and one-sided carriage- and equipment-related rules that constrain competition, arbitrarily pick winners and losers, and, ultimately and consequently, harm consumers.

However, as I pointed out in "On Video, the FCC's Competition Report Falls Short," a January 2023 Perspectives from FSF Scholars, the ensuing Report failed to articulate an appropriate deregulatory agenda in response to the markedly transformed video programming landscape that it described. (Keep in mind, too, that that Report focused on the years 2020 and 2021 – a lifetime ago given the pace at which video distribution is evolving.)

Going forward, Free State Foundation scholars will continue to highlight data points compelling Commission deregulatory measures that afford every participant in the vibrantly competitive video programming marketplace an equal opportunity to compete.

The D.C. Circuit Upholds Removal of Legacy Investment Barriers

A decision by the D.C. Circuit on November 3 sets an important precedent for paring back 25-year-old forced-access regulation of communications networks. The court's ruling in Comptel v. FCC upheld the Commission's 2019 UNE Forbearance Order, which lifts certain legacy unbundling and resale requirements. Wireless and VoIP have long since eclipsed copper wire-based voice services, and the consumer benefits from intermodal competition made the old restrictions unnecessary. The D.C. Circuit's decision provides solid legal support for future agency actions to lift outdated regulations and encourage deployment of next-generation networks. 

The Telecommunications Act of 1996 requires incumbent local exchange carriers (ILECs) to make their facilities available to direct competitors at government-set rates. Back in the early 1990s, ILECs using copper wire-based Time Division Multiplexing (TDM) technologies were the dominant providers of local voice services. The 1996 Act's forced-sharing requirements, it was supposed, would enable competitors to lease capacity from ILEC facilities while building out their own facilities, thus leading to facilities-based competition among wireline voice providers. 

At issue in Comptel v. FCC was the Commission's decision in the 2019 UNE Forbearance Order to cease enforcing unbundling mandates regarding analog loops at government-set rates and to also cease enforcing its avoided-cost resale obligations. Under those obligations, ILECs must resell their retail service at wholesale, and at regulated rates, to their competitors.  

In reviewing the record, the D.C. Circuit observed the stunning difference in the voice service market today compared to more than two decades ago:

Rather than the near-complete monopoly that incumbents had as recently as 1996, now incumbents account for just 12% of all voice connections (both wired and mobile voice plans) and 37% of all wireline telephone connections (the subset of all voice connections that are physical rather than wireless—e.g., TDM copper, cable, and fiber). Lines sold through the unbundled copper loops account for less than 0.5% of all voice connections (less than 2% of wireline connections) and resold lines account for just over 1% of all voice connections (3% of wireline connections). Further, the Commission found that next-generation voice services like mobile phones and Voice Over Internet Protocol (VoIP) services are rapidly growing, whereas traditional copper wire voice services are declining in both market share and in absolute terms. 

Data released since the 2019 UNE Forbearance Order shows that consumers migration to wireless and VoIP services continues. According to an order released by the Commission on October 28 of this year: "Incumbent LECs' wireline voice subscriptions now account for… only 9% of all voice subscriptions across all technologies." Observing further migration in the residential and enterprise services markets away from TDM switched access lines, the order stated that "[t]he widespread deployment of 5G wireless networks will only accelerate this process."

 

Importantly, in Comptel v. FCC, the D.C. Circuit upheld the analytical basis for the Commission's deregulatory action in view of today's voice services market:

The Commission looked, reasonably in our opinion, at the whole national market for voice transmission, and the incumbents' share of that market is declining rapidly. Indeed, from the point of view of the incumbents, alarmingly. Far from the market behemoths the incumbents were in the late 90s, they look more like the sick men of the voice transmission market. Their copper wire advantage is of rapidly declining importance. It is myopic to look at the incumbents' possession of copper loops as giving them meaningful market power in the national voice market. And therefore what earthly economic reason would justify requiring them to provide their copper wire services to competitors at a subsidized price? 

Also important was the D.C. Circuit's unwillingness to limit the Commission's forbearance authority because that agency declined to grant deregulatory relief several years earlier. The D.C. Circuit rejected the notion that the Commission's 2010 Qwest Phoenix MSA Order precluded the grant of relief in the 2019 UNE Forbearance Order. As the court pointed out, the two orders and their contexts were decidedly different. Whereas the 2010 order denied forbearance relief from nationwide regulation in a specific geographic area using a different kind of market power analysis, the 2019 order granted nationwide relief based on an assessment of national market conditions that demonstrated vibrant intermodal competition. 

 

Citing the Supreme Court's decision in NCTA v. Brand X (2005), the D.C. Circuit acknowledged that "agencies are expected to reevaluate the wisdom of their policies in response to changing factual circumstances." According to the D.C. Circuit: "[h]ere, the FCC explained how the market had evolved and concluded—we think reasonably—that intermodal competition is now sufficient to discipline prices." And the court reiterated its precedents that the Section 10 forbearance authority imposes "no particular mode of market analysis or level of geographic rigor," as it leaves the Commission free to "tailor the forbearance inquiry to the situation at hand." 

 

As the D.C. Circuit stated, "our precedent and Commission precedent is clear: the Commission may forbear to encourage the deployment of next-generation facilities." Indeed, the decision in Comptel v. FCC should encourage future exercises of the Commission's unique forbearance authority to clear away legacy telecommunications regulation. The nation's gigabit and 5G future – and consumer welfare – depend on competing communications providers investing in their own facilities rather relying on forced access regulation and government price controls.  

FCC Proposes Order to Remove Old Unbundling and Resale Requirements

The FCC has released the tentative agenda for its October 27 public meeting. Among the items scheduled for a vote, is a draft Report and Order that would eliminate several unbundling and resale requirements. The deregulatory proposal that preceded this order was the subject of my February 2020 Perspectives paper, "FCC Should Go Full Speed Ahead in Removing Unbundling Regulations." As briefly explained in that paper, the rationale for unbundling regulation has long since gone up in smoke, as voice markets are competitive and the retail market share for incumbent local exchange carriers is a fraction of what it was in 1996. The draft order builds upon agency precedent that recognized the market's competitiveness as the basis for removing outdated unbundling regulations. 

The Commission's draft order embodies compromises struck between ILECs and competitive local exchange carriers. If adopted, the Commission's draft order would constitute an important deregulatory achievement in doing away with costly requirements that have outlived any usefulness they once held for consumers and enable communications providers to dedicate additional resources to next-generation broadband networks. Notably, the draft order provides transition periods for eliminating unbundling regulations in competitive areas, and it retains unbundling requirements in areas where there apparently is less competition.

In two paragraphs, the Commission's draft order sums up the competitive and innovative progress that compels the agency's proposed transition to a less-regulatory policy:

22. The communications marketplace has dramatically transformed since Congress passed the 1996 Act. Incumbent LECs controlled 99.7% of the local telephone service market at that time. Incumbent LECs’ wireline voice subscriptions now account for only approximately 39% of all wireline voice subscriptions and only 9% of all voice subscriptions across all technologies. The fixed voice marketplace, once monopolized by incumbent LECs, now includes cable companies offering VoIP, fixed wireless providers, over-the-top VoIP providers, as well as competitive and incumbent LECs. As for fixed broadband, incumbent LECs are just one of many intermodal competitors, providing only about 22% of residential broadband subscriptions at or above 25/3 Mbps, which the Commission has defined as advanced telecommunications capability. As of December 31, 2019, 99% of Americans had access to three providers of mobile voice and broadband. Finally, as the Commission found in the BDS Order, the enterprise market is subject to “intense competition,” with 95% of census blocks with business data services demand in price cap MSAs, representing 99% of business establishments, featuring at least one competitive provider in addition to the incumbent LEC. 

 

23. The communications marketplace has also seen rapid technological change. In the enterprise services marketplace, DS1 and DS3 loops, dominated by incumbent LECs, have been increasingly replaced by packet-based services, provided by a range of providers who benefit from a “considerably more level playing field” compared to TDM-based services. The copper-to-fiber and TDM-to-IP transitions have also increasingly reached residential consumers, as incumbent LECs have been retiring last-mile copper and replacing it with fiber or fixed wireless technologies. And of course, American consumers have themselves transitioned to newer technologies, increasingly moving from fixed legacy voice to fixed or nomadic voice over Internet protocol (VoIP) and mobile voice services, and from DSL to broadband provided over fiber and fixed and mobile wireless. The widespread deployment of 5G wireless networks will only accelerate this process.